Is A 26% Jump In GDP Good For Ireland?

When Eire’s Central Statistics Office (CSO) published that, in 2015, that the country’s GDP had risen by 26%, over €50 billion, exports jumped by €75 billion, imports increased by €40 billion and productive assets rose from €700 billion to €1000 billion, some may have been inclined to see this as an excuse to throw a party, a measure of the supreme success of the economic and political minds of contemporary Ireland and sure fire guarantee of their financial security for the next decade. But for many it was nothing more than a mirage that could be laid at the door of a few usual suspects.

The Central Statistics Office has strict privacy rules that prevent it from revealing certain data that could have been a factor in the sudden spike in GDP figures but the Irish government has been very tax friendly to giant multinationals and a number of the said (formerly) foreign agents, mainly pharmaceuticals and technology companies. They have set up headquarters in the country bringing billions in assets with them. Along with their billions they have brought some ruthless, if not downright shady business and accounting practices. The CSO gives only clues, being very protective about disclosing information relating to them, but the gigantic nature of the annual change in figures leave a very short list to choose from. The fact that these changes did not show up in the monthly figures is another surefire indicator that the boost to GDP was a result of the actions of multinationals. Even the IMF was moved to comment that growth statistics were probably due to the activities of global companies, suggesting that 5% growth – reported by Forex brokers, would be flattering real rate and 26% an absurdity. There are four key business practices that have been influential here: contract manufacturing, tax inversions, relocating intellectual property and aircraft leasing.

Contract Manufacturing

This is where production of a good or component is outsourced overseas on the behalf of the company in Ireland. This sourcing across multiple jurisdictions complicated national accounting but is a feature of modern globalization. In fact the COS has known that the GDP figures of Ireland have been artificially inflated for a number of years, alerted to the situation by a government advisory council in 2014 that contract manufacturing was an increasingly powerful influence. In the past finished goods were often transported to Ireland to be packaged, thus appearing as imports on the national accounts, but today not even that is happening and these goods do not come to Ireland at all, appearing only as exports.

Tax Inversion

This is where a firm, typically from the US, buys out another firm from abroad, Ireland in this case, and then relocates to the country in which the acquired firm is located. The US firm would usually be the bigger firm but the deal is dressed up to seem like the US firm has been acquired by the foreign firm, hence the inversion. The US firm then moves its domicile abroad to Ireland but keeps its operations in the US. The lower tax rate in Ireland is the motivating factor here. This practice led to a clampdown by the US treasury earlier this year, scuppering the Pfizer-Allergan deal, keeping their headquarters in New York (instead of Dublin).

Relocating Intellectual Property

Relocating intellectual property (IP) to a tax haven, while perfectly legal, led to controversy in the press. It is a practice whereby IP assets are transferred from one jurisdiction to another lower tax jurisdiction. The intention is to maximize profits from IP in low tax countries and minimize profits in high tax countries. Apple have, it is surmised, done exactly this moving it’s extremely valuable IP to its headquarters in Cork for sales outside the US economy. The actual value to the economy of this is perhaps minimal but it could have had a profound influence on the 2015 metrics.

Aircraft Leasing

Ireland is a world center of aircraft leasing, with 4000 commercial aircraft leased worth over €100 bn in revenue. Last year Aercap took over rival International Lease Finance Corporation in a deal worth €39 billion, probably contributing to the Irish GDP bubble. Aircraft leasing only began to be taken account of last year and it seems to have had a seriously distorting effect already. There are moves afoot to count purchases of aircraft overseas as imports, though whether that will clarify things or only muddy the water further remains to be seen.

So, what can we take away from all this?

One: the growth in GDP was a result largely of physical goods not manufactured in Ireland.

Two: the entities responsible are very large multinationals. There is no doubt that courting these multinationals has been a matter of government policy, but will this do the Irish any good in the long run or lead to any sight of general prosperity? Or is it a relocation bubble? The statistical anomaly makes it difficult to take anything away from last years figures to make plans for the future, at least unless you are privy to the full picture. It’s hard to know if the economy is overheating or stagnant. The public will be expecting public money to be spent and taxes to be cut, but we have been here before in Ireland in 2008. It didn’t end well then and it could be the same situation now. The international view of these developments is also a concern. The IMF has already been mentioned but what about the EU, how will they view the tax breaks given to mostly US companies? Moody’s rating agency recommended the Irish government keep more reserves in case of a sudden downturn amid fears of volatility. It should not be forgotten that these companies relocated to Ireland primarily for tax breaks. If something changes in that equation they can just as easily move away again.